1. Field of the Invention
The present invention is directed to managing pre-trade risk of financial securities transactions. More specifically, the present invention is directed to a reprogrammable high-speed hardware device containing hardware-embedded computer code which parses and analyzes incoming securities orders to ensure that the orders are within the risk, compliance and regulatory parameters established by a broker-dealer or other financial institution.
2. Description of the Related Art
A broker-dealer is a term used in United States financial services regulations to describe a financial institution that trades securities for its own account or on behalf of its customers. Although many broker-dealers are independent firms solely involved in broker-dealer services, many others are business units or subsidiaries of commercial banks, investment banks, or investment firms.
When executing trade orders on behalf of a customer, the institution is said to be acting as a broker. When executing trades for its own account, the institution is said to be acting as a dealer. Securities bought from customers or other firms in the capacity of dealer may be sold to other customers or other firms acting again in the capacity of dealer, or the securities may become a part of the firm's holdings.
Broker-dealers have a responsibility to perform risk/compliance validation of incoming orders before they are submitted to market. Broker-dealers also have a responsibility to perform pre-trade risk/compliance checks on all incoming customer orders where the dealer acts as the executing broker. There are currently software-only systems in place today which perform such checks. Such software-only risk-management products have to wait for an entire incoming message to go through the whole network stack before examining the message in accordance with risk-management procedures and deciding whether or not to pass the order to the exchange. These software-only systems introduce latencies which can be prohibitive for particular customer types, such as those that require very high-speed transactions.
in-FPGA Trading Systems (Seattle, Wash.) has announced a hardware-accelerated automated trading reference system. The in-FPGA system combines the NASDAQ ITCH and OUCH order entry protocols on a single FPGA logic processing board, and purportedly reduces trade response latency to under two microseconds. However, this system originates orders based upon pre-defined market conditions. That is, the in-FPGA system is pre-programmed to review current market condition, and if the system determines that it can take advantage of current pricing and availability of particular securities, the system will generate new orders to take advantage of such market conditions. The in-FPGA system is not programmed to conduct risk management assessments of new incoming orders.